The Governance Standards

February, 2013

When the Australian Charities and Not-for-Profit Commission Act 2012 (ACNC Act) was passed in December last year it established the ACNC, the new regulator of charities and potenitially all not-for-profits from 2014 onwards.

We were unable to get a full picture of how the ACNC would operate back in early December because much of the ACNC Act refers to the governance standards, which are Regulations attached to the ACNC Act that had not yet been unveiled.

Why do the governance standards matter?

Some of the most significant powers of the ACNC Commissioner include the power to de-register charities and remove from office the people who are responsible for running charities. The Commissioner’s ability to do these things depends on the governance standards.

So what will the governance standards look like?

The Government released a governance consultation paper at the end of December. The consultation paper includes draft governance standards and gives us an idea of what the final governance standards will look like.

The Government have proposed 6 governance standards. We summarise them briefly below:

Governance standard 1:

Make information about the charity’s purpose available to the public, and comply with those purposes.

Governance standard 2:

Be accountable to members and allow members opportunity to raise governance concerns.

Governance standard 3:

Comply with Australian laws – do not do anything that could be dealt with as an indictable offence.

Governance standard 4:

Manage financial affairs in a responsible manner.

Governance standard 5:

Identify and remove directors and other responsible officers who have been disqualified from managing a corporation under the Corporations Act 2001 or disqualified by the ACNC Commissioner in the previous 12 months.

Governance standard 6:

Charities must make sure the people who are responsible for running the charities:

– act with care and diligence;

– act in good faith and in the best interest of the charity;

– not misuse their position;

– not misuse information;

– disclose conflicts of interest; and

– not allow the charity to operate while insolvent.

Are they what we expected?

Principles based

The ACNC Act and the policy surrounding that Act explains that the governance standards should be principle based with the intention being that the governance standards would represent the end goals, leaving charities free to determine how to reach those goals. The Government wanted to ensure that charities have flexibility to continue doing the good work that they do in the way that best suits them.

Given this background, the governance standards are more prescriptive than anticipated. As a result, a number of charities have expressed their concern in this regard at the ACNC’s consultation sessions held around the country and in written submissions. Charities are concerned that the prescriptive nature of the proposed governance standards will enable the ACNC to unnecessarily interfere with the operations of charities. We expect that the governance standards will be amended to reflect the principles based approach which was promoted in the ACNC Act’s development.

Proportional to the size of the charity

The ACNC Act also intends for the governance standards to take into account the very wide range of charities which will be governed by the standards. The intention was for the governance standards to be able to be applied differently for different sized charities. For example, under governance standard 2, a smaller entity might satisfy the requirement that it be accountable to its members by simply providing annual reports, whereas a larger entity might have to hold annual general meetings and enable members to propose resolutions. Not all of the proposed governance standards demonstrate this proportional approach.

Compliance with numerous laws

Governance standard 6 requires that all charities ensure that the people who are responsible comply with certain duties. Those duties are essentially the directors’ duties found in the Corporations Act 2001.

For the 6,000 charities which are companies, they will no longer have to comply with the Corporations Act directors’ duties (as of 1 July 2013). They will, however, still have to comply with the many other laws that impose legal liability on directors and officers. For example, in New South Wales there are in excess of 130 NSW statutes and 30 Commonwealth statutes which impose personal liability on company directors and officers.

For the 50,610 charities registered with the ACNC which are not companies, they will now have to ensure their directors and officers comply with the directors’ duties in governance standard 6, and the directors and officers will have to ensure they comply with all other laws which currently impose duties on them personally.

For example, a person responsible for an incorporated association in Victoria will have to act in good faith in the best interests of the charity in order to comply with both governance standard 6, and with Associations Incorporation Reform Act 2012. Governance standard 6 requires the office holder to act in good faith and in the best interest of the charity to further the purposes of the registered entity. The Associations Act requires the

office holder to exercise his or her powers and discharge his or her duties in good faith in the best interests of the association, and for proper purpose. The wording of the duty is slightly different in governance standard 6 and the Associations Act, and so an incorporated association may have to consult both the Associations Act and the governance standard to check that it is complying.

Who is actually responsible?

The ACNC Act only contemplates a charity breaching the governance standards. The ACNC Commissioner is empowered to remove the people who are responsible for charities only if the charity itself has, or might, breach a governance standard. However, many of the governance standards, particularly governance standard 6, actually relate more to the actions of the responsible people as opposed to the charity.

This results in a potentially very roundabout way of removing a director for bad behaviour. If a director misuses his or her position, then the charity may be found to have breached governance standard 6. If the charity breaches governance standard 6, then the ACNC Commissioner can suspend or remove the director.

An interesting outcome of this is that directors of companies which are charities do not now have as many legal duties personally as the officers of incorporated associations. The Corporations Act 2001 directors’ duties won’t apply to directors of companies any more, and the governance standard imposes the duty on the charity, not the director.

How will the governance standards be used?

The governance standards are pivotal in the ACNC’s ability to act. The ACNC’s ability to remove charities and responsible people relies on there being a breach of the governance standards.

The ramifications of the ACNC removing a charity from the register are that the charity will not be eligible to receive tax concessions from the ATO. If a responsible person is removed by the ACNC, he or she will only be allowed to have limited contact with that charity and could be restricted in becoming a director of all charities.

Summary

The governance standards are not what we expected and it will be interesting to see how they are changed following consultation with the sector.